Management Accounting · Standard Costing and Variance Analysis (Management Accounting)

Standard Costing: Concepts and Setting Standards for CMA Inter

Updated 10 October 2026 · Fact-checked

Standard costing is a technique where you fix a predetermined cost for each unit of output, compare it with the actual cost, and analyse the difference as variances. Standards are set for material, labour and overheads using quantity, price and rate. The standard cost of a unit is the sum of these three.

Understand Standard Costing: Concepts and Setting Standards

A standard cost is a carefully predetermined cost of a product or service, based on specified efficient operating conditions. It tells you what a unit *should* cost, not what it did cost. Standard costing is the technique of setting these standards, recording actual costs, and comparing the two to find variances.

The main objectives are cost control, performance measurement and fixing responsibility. It also helps in pricing, valuing stock and work-in-progress at standard cost, and managing by exception. Management looks only at big deviations instead of every item.

Standards are of different types. An ideal standard assumes perfect conditions: no waste, no idle time, no breakdowns. It is rarely achievable and can demotivate staff. A basic standard is fixed for a long period and not revised. It is used as a base for comparing trends over years. A normal standard is based on average conditions expected over a business cycle. A current standard is set for a short period and reflects present conditions. It is attainable and is the most practical for control. Expected (attainable) standards are similar and allow for normal losses.

To set the standard cost you fix, for each cost element, a standard quantity (or time) and a standard price (or rate). For material: standard usage per unit, including normal wastage, multiplied by standard price. For labour: standard hours per unit, including normal idle time, multiplied by standard rate per hour. For overheads: a standard overhead rate is the budgeted overhead divided by the budgeted base, such as budgeted hours or units, multiplied by the standard hours per unit.

Standard costing and budgetary control both rely on predetermined figures and comparison. But a budget is a total plan for a department or the business, while a standard is a unit cost. Budgets set limits on expenditure. Standards measure efficiency of production. Budgetary control works for all functions. Standard costing mainly suits repetitive production with similar products. Standards are the unit-level building block of budgets.

Limitations: it is costly to set up and keep updated, it suits poorly where products are non-standard or made to order, standards may become outdated when prices change fast, and rigid use can hurt morale.

Key rules to remember

Standard material cost per unit: Standard quantity per unit × Standard price per unit of material; Standard quantity includes normal wastage or normal loss. Use gross input if output is net of loss.
Standard labour cost per unit: Standard hours per unit × Standard rate per hour; Standard hours include allowance for normal idle time. Compute the rate from wage rate and any fixed allowances.
Standard overhead absorption rate: Budgeted overhead ÷ Budgeted base (units or standard hours); Compute separately for variable and fixed overhead. Use the same base for both.
Standard overhead cost per unit: Standard overhead rate × Standard base per unit; For a per-unit rate use units as the base. For an hourly rate multiply by standard hours per unit.
Standard cost per unit: Standard material + Standard labour + Standard variable overhead + Standard fixed overhead; Add standard profit to get standard selling price.
Standard cost for actual output: Standard cost per unit × Actual output; This is the base for comparing actual cost. Never use budgeted output unless asked.

How to solve Standard Costing: Concepts and Setting Standards questions

For any question on concepts, theory or building a standard cost sheet, follow this order.

1Read what is asked: a definition, a comparison, a type of standard, or a standard cost sheet.
2For theory, define the term in one line, then give points in a short list. Add a one-line example if the question allows.
3For a cost sheet, list the elements: direct material, direct labour, variable overhead, fixed overhead.
4Work out standard quantity per unit including normal loss, then multiply by standard price.
5Work out standard hours per unit including normal idle time, then multiply by standard rate.
6Compute the overhead rate as budgeted overhead ÷ budgeted base, and apply it to standard base per unit.
7Add the elements to get standard cost per unit. Add profit if a selling price is required.
8Show workings clearly with labels and units, and state the final answer.

Quickest way: Cost sheet in five lines

When to use it: Use when you must build a standard cost per unit under time pressure.

Write four rows: Material, Labour, Variable overhead, Fixed overhead.
Fill quantity or hours per unit, adjusted for normal loss or idle time.
Fill price or rate for each row, computing overhead rates from budget figures first.
Multiply across and total the last column.
Check that the base for overhead rate and the base per unit match.

Common mistakes in Standard Costing: Concepts and Setting Standards

Treating ideal standard as the one used for control.
The word ideal sounds best, so students assume it is preferred.
Fix: Remember that ideal standards ignore normal losses and are rarely attainable. Current or normal standards are preferred for control.
Ignoring normal loss when setting the material quantity.
Students use only the net output quantity given in the question.
Fix: Divide net output by (1 − loss %) or add the normal loss to get standard input. Only normal loss is included, not abnormal loss.
Mixing up standards and budgets.
Both use predetermined figures, so the difference feels small.
Fix: Say that a standard is a unit cost for efficiency, and a budget is a total expenditure limit for a period or department.
Confusing current and basic standards.
Both are described as fixed for a time.
Fix: A basic standard is not revised for long periods and acts as an index. A current standard is revised to reflect present conditions.
Using the wrong base for the overhead rate.
Students divide by units but then multiply by hours.
Fix: Choose one base. If the rate is per hour, multiply by standard hours per unit. If per unit, multiply by one.
Listing advantages without limitations, or the reverse.
Students prepare only one side.
Fix: Prepare both and give at least three points each, with a short explanation.

Worked examples

Example 1

A product needs 4 kg of material A per unit net. Normal loss is 20% of input. Standard price is ₹50 per kg. Each unit needs 3 productive hours of labour at ₹40 per hour. Idle time is 10% of hours paid, and labour is paid for all hours. Overhead is absorbed on hours paid. Budgeted variable overhead is ₹2,40,000 for 24,000 hours paid. Budgeted fixed overhead is ₹3,60,000 for 24,000 hours paid. Find the standard cost per unit.

Show the solution

Material input per unit = 4 ÷ (1 − 0.20) = 4 ÷ 0.80 = 5 kg.
Standard material cost = 5 × ₹50 = ₹250.
Productive hours per unit = 3. Idle time is 10% of hours paid, so hours paid = 3 ÷ 0.90 = 3.333 hours.
Standard labour cost = (10/3) × ₹40 = ₹133.33.
Variable overhead rate = ₹2,40,000 ÷ 24,000 = ₹10 per hour paid. Applied on 3.333 hours = ₹33.33.
Fixed overhead rate = ₹3,60,000 ÷ 24,000 = ₹15 per hour paid. Applied on 3.333 hours = ₹50.
Standard cost per unit = 250 + 133.33 + 33.33 + 50 = ₹466.67.

Answer: Standard cost per unit is about ₹466.67 (material ₹250, labour ₹133.33, variable overhead ₹33.33, fixed overhead ₹50).

Example 2

Distinguish standard costing from budgetary control in five points, and name which type of standard you would use for day-to-day control and why.

Show the solution

Nature: standard costing fixes a unit cost. Budgetary control fixes total targets for income and expenditure.
Basis: a standard is a scientifically determined measure of what should be. A budget is a forecast of what is planned, often based on past experience.
Scope: standard costing mainly covers production cost. Budgetary control covers all functions such as sales, purchase, cash and capital.
Use: standards measure efficiency and fix responsibility for variances. Budgets set limits and coordinate activities.
Suitability: standard costing suits repetitive production. Budgetary control suits almost any business.
For day-to-day control, use current standards. They are set for the present conditions, are attainable, and so give variances that managers can act on.

Answer: Standard costing is unit-based, efficiency-focused and suited to repetitive production. Budgetary control is total-based, plan-focused and company-wide. Current standards suit day-to-day control because they are attainable and reflect present conditions.

Exam tips

Theory questions on types of standards often ask you to distinguish them. Give one line each and one point on usefulness.
In cost sheets, show the adjustment for normal loss and idle time as a separate line so you get step marks.
Write the formula before each computation, then the numbers, then the answer with a unit.
For MCQs, watch for words like ideal, attainable, long period and short period. They point to the type of standard.
When asked to compare standard costing and budgetary control, answer in a two-column format with at least five points.

Practice questions from Standard Costing and Variance Analysis (Management Accounting)

Standard Costing: Concepts and Setting Standards in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Standard Costing: Concepts and Setting Standards: frequently asked questions

What is the meaning of standard costing?

Standard costing is a technique in which predetermined costs are set for each unit of output. Actual costs are compared with them and the differences, called variances, are analysed. It supports cost control and performance measurement.

What are the types of standards?

The common types are ideal, basic, normal and current standards. Ideal assumes perfect efficiency. Basic is fixed for a long period. Normal reflects average conditions over a cycle. Current is set for a short period for present conditions.

How do you set a standard for material, labour and overheads?

For material, multiply standard quantity, including normal loss, by standard price. For labour, multiply standard hours, including normal idle time, by standard rate. For overheads, divide budgeted overhead by the budgeted base and apply the rate to the standard base per unit.

What is the difference between standard costing and budgetary control?

Standard costing sets a cost per unit and focuses on efficiency in production. Budgetary control sets total targets for a period across all functions and focuses on planning and limits. Standards are often used as inputs when preparing budgets.